SECTOR: TYRE
Balkrishna Industries Ltd
STOCK INFO.
BLOOMBERG
BSE Sensex:18,197
S&P CNX:5,482
(Consolidated)
Y/E MARCH
BIL.IN
REUTERS CODE
1 August 2011
Initiating Coverage
(Rs CRORES)
Accumulate
Rs170
BLKI.BO
FY11A
FY12E
FY13E
We recommend to Accumulate Balkrishna Industries Ltd.
(BKT) with a price target of
Rs
225-5xFY13 EV/EBITDA multiple.
INVESTMENT ARGUMENTS:
A focussed small fast-growing player in a niche market
Market-share to rise on cost advantage and price differential
Volumes and margins to rise on expansion
Strong replacement market a positive
GROWTH DRIVERS
A focussed small fast-growing player in a niche market:
Balkrishna Industries operates in the off-the-road (OTR) tyres segment
i.e. tyres for tractors and Heavy equipment. The OTR market at $11-
12bn is 6.5-7% of the global tyre market of $171bn, and growing at 3-
4% p.a..Only Goodyear, Firestone and Michellin, BKT, Titan and Mitas
have a presence in this market. BKT, as a focussed player in this
niche area, has grown 3x over FY06-FY11 improving market share
by exploiting scope to offer cost-benefits to customers.
Market share to rise on cost advantage and price differential:
BKT’s operations in India, offers advantages such as low cost of labour
and proximity to rubber producing regions. This enables it to sell its
tyres at a 25% discount to other players and still make good margins.
This cost differential is reflected in the 16% operating margin for the
company as of Mar-11 as compared to 9.5% for Titan International.
There is scope to improve marketshare as and when capacity rises.
Volumes and margins to rise on expansion:
BKT, with 93%
utilization in FY11, has planned capex of
Rs1400cr
to expand effective
capacity from 120,000 tonnes to 230,000 tonnes by Sept\Oct-12. Of
this, 27000 tonnes will be through brownfield expansion by 3QFY11.
Also, the new 90,000 plant at Bhuj offers logistical advantage due to
port-based location and cogen plant that could offer some incremental
cost savings.This new capacities will allow BKT to double revenues
and profits over the next 3-4 years.
Strong replacement market a positive:
The average life of an
OTR tyre is 1-1&1/2 years for mining, 2 years for Industrial and
Construction and 3-4 years for Agri tyres. BKT derives 80% of its
revenues from the replacement market. The replacement market offers
higher margins and scope for repeat sales.
Valuations & View:
Despite strong institutional interest, low float
and good earnings prospects, Balkrishna Industries trades at 4.2x
FY13E EV/EBITDA multiple. We value the company at 5xEV/
EBITDA multiple on FY13E EBITDA giving us a target of
Rs225.
Net sales
EBITDA
RPAT
BV/Share (Rs)
Adj. EPS (Rs)
EPS growth (%)
P/E (x)
P/BV (x)
EV/EBITDA (x)
Div yld (%)
ROE (%)
RoCE (%)
2,192
388
193
89.1
20.0
-12
8.5
1.9
5.8
0.8
25
23
2,828
546
264
114.3
27.3
37
6.2
1.5
5.0
1.0
27
22
3,514
689
309
144.0
32.0
17
5.3
1.2
4.2
1.2
25
20
STOCK DATA
52-W High/Low Range (Rs)
Major Shareholders (as of June 2011)
Promoter
Institutions
Public & Others
Average Daily Turnover(6 months)
Volume
Value (Rs cr)
1/6/12 Month Rel. Performance (%)
1/6/12 Month Abs. Performance (%)
Shares Outstanding (cr)
Market Cap. (Rscr)
Market Cap. (US$ m)
Past 3 yrs Sales Growth (%)
Past 3 yrs NP Growth (%)
175 / 110
54.4
30.9
14.7
52,679
0.75
13/42/32
10/43/33
9.7
1,643.1
368.4
24
20
Maximum Buy Price :
Rs
Rs180
Ravi Shenoy
(ravi.shenoy@motilaloswal.com); Tel:+912230896865

Balkrishna Industries Ltd
CONCERNS
Input price changes :
Raw Material costs were at 60% of revenue in FY11. Raw
materials include natural rubber and crude derivatives such as synthetic rubber and carbon
black. These prices vary on a daily basis and have seen fluctuations of 25%+ in the last
two years. BKT changes prices of its tyres generally twice in a year. Hence, a sharp price
hike in the input commodities can significantly affect margins and hence profitability on a
quarterly basis. Margin impacts will also include the impact on inventories, which can be
as high as 4 months of consumption.
Currency fluctuation risks :
BKT derives only 10% of its revenues from India, but
most of its costs are Rupee denominanted. Raw materials are global commodities and
should be priced based on international parity. But, a strong natural rubber lobby restricts
imports and domestic prices could get out of line of global prices. Debtor days tend to be
restricted to shipping time. Even so the foreign currency exposure is large and hence any
adverse movement in the currency can severely impact profitability of the company.
Poor dividend payout :
BKT's payout only is only 8% leading to a dividend yield of 1%.
This could be due to the large capex plans. However, given the low equity a small percentage
increase in payout should result in a large payment per share. For e.g., a increase in
payout from 8% to even 20% can raise dividend per share in FY13 close to Rs. 6 per
share - a yield of close to 4% on the current price. A continued low payout may not allow
valuations to rise signifcantly beyond historical averages.
BACKGROUND
Balkrishna Industries Ltd, a Siyaram Poddar group company, is engaged in the production
of Off-Highway Tires (OHT) catering to various segments viz. agricultural, industrial,
material handling, forestry, lawn and garden, construction and earth moving tires. The
company generates 90% of its revenues from exports and has a ~4% global market share
in the segment. 80% of its sales are from a dealer network spread accross the globe, with
47% and 23% of revenue from Europe and US.
FINANCIALS AND RECENT RESULTS
Revenues in the quarter-ended March 2011 grew 31%, but EBITDA and PAT degrew
15% and 27% respectively y/y as the company did not fully pass on raw material cost
inflation. This is reflected in margins being lower y/y as well as q/q. A price hike in April
2011 should result in improved performance in 1QFY12.
.
Quarterly Performance (Consolidated)
Rs
CRORES
QE MAR-10
QE DEC-10
QE MAR-11
% Y/Y
% Q/Q
Revenue
Expenditure
EBITDA (excl. Other income)
Other Income
Interest
Depreciation
Profit before tax
Tax
RPAT
EBIDTA (%)
Tax rate (%)
438.6
332.2
106.4
9.0
4.1
17.6
93.4
30.0
63.5
24.3
32.1
492.9
408.1
84.8
2.0
11.0
19.0
56.6
18.4
38.2
17.2
32.5
573.9
483.3
90.6
8.0
12.0
20.0
66.7
20.4
46.4
15.8
30.5
31
45
-15
-6
197
14
-29
-32
-27
16
18
7
356
9
5
18
11
21
1 August 2011
2

Balkrishna Industries Ltd
IVRCL: Financials and Valuation
Balkrishna Industries Ltd - Financials & Valuation
INCOME STATEMENT (Consolidated)
Y/E MARCH
2009A
2010A
(Rs CRORES)
Rs
2011A 2012E
2013E
RATIOS
Y/E MARCH
2009A
2010A 2011A
2012E 2013E
Net Sales
growth (%)
Other Income
Total Income
Staff Costs
Raw material expenses
SG&A
Other Expenses
Total Expenditure
EBITDA
% of Net Sales
Depreciation/Amortization
Finance Charges
PBT
Tax
PAT
growth (%)
PAT MARGIN
1,400
23
(31)
1,369
45
796
125
191
1,157
213
15
59
38
116
41
75
-33
5
1,564
12
30
1,594
58
783
131
206
1,177
417
27
69
19
329
110
219
193
14
2,192 2,828
40
29
20
20
2,213 2,848
71
80
1,318 1,669
164
212
271
342
1,825 2,302
388
18
77
22
288
95
193
-12
9
546
19
90
62
394
130
264
37
9
3,514
24
35
3,549
107
2,063
264
426
2,860
689
20
150
78
461
152
309
17
9
Adjusted EPS (Rs)
Rs)
Growth (%)
Cash EPS
Book Value
DPS
Payout (Incl. Div. Tax)
Valuation (x)
P/E
Cash P/E
Price/Book Value
EV/EBITDA
EV/Sales
Div. Yld
Profitability Ratios (%)
RoE
RoCE
Leverage (x)
Debt/Equity (x)
7.7
-32
10.7
49.5
1.2
18
22.1
15.9
3.4
9.9
1.5
0.7
17
15
1.0
22.7
195
26.2
70.5
1.4
7
7.5
6.5
2.4
5.1
1.4
0.8
38
31
0.7
20.0
-12
24.0
89.1
1.4
8
8.5
7.1
1.9
5.8
1.0
0.8
25
23
0.7
27.3 32.0
37
17
32.0 39.7
114.3 144.0
1.7 2.0
7
7
6.2
5.3
1.5
5.0
1.0
1.0
27
22
1.3
5.3
4.3
1.2
4.2
0.8
1.2
25
20
1.0
BALANCE SHEET (Consolidated)
Y/E MARCH
2009A
(Rs CRORES)
Rs
2010A 2011A 2012E 2013E
CASH FLOW STATEMENT
(Consolidated)
(Rs CRORES)
Rs
2011A 2012E 2013E
Y/E MARCH
2009A 2010A
Equity Share Capital
Preference Share Capital
Reserves
Shareholders' Funds
Debt
Net deferred tax
Sources of Funds
Net Block
Capital WIP
Investments
Current Assets
Inventories
Sundry Debtors
Cash and Bank Balances
Loans and Advances
Other Current Assets
Current Liabilities & Provisions
Net Current Assets
19
0
459
478
483
55
1,015
564
82
4
653
133
221
12
288
0
288
366
19
0
662
681
19
19
19
0
0
0
842 1,086 1,372
861 1,105 1,391
478
621 1,444 1,444
58
60
67
74
1,217 1,543 2,616 2,910
647
69
62
725
161
14
696 1,696
800
50
339
139
PBT before EO items
Add : Depreciation
Interest
(Inc)/Dec in WC
Others
CF from Operating activities
116
329
59
69
38
19
42
14
32 (221)
287
210
288
394
461
77
90
150
22
62
78
(164) (141) (204)
(150) (126) (148)
73
278
337
(230) (700) (400)
59 (325)
200
(171) (1,025) (200)
144
(16)
(22)
(2)
105
7
5
12
823
(16)
(62)
0
745
(2)
12
10
0
(20)
(78)
0
(98)
39
10
50
(Inc)/Dec in Fixed assets
(132) (141)
Others
(0) (56)
CF from Investing activities (132) (196)
Inc/(Dec) in debt
(90)
Dividend paid
(24)
Less: Interest paid
(38)
Others
(1)
CF from financing activities (153)
Inc/(Dec) in cash
Add: Beginning balance
Closing Balance
1
10
12
14
(14)
(19)
(1)
(20)
(6)
12
5
859 1,275 1,482 1,805
218
423
504
626
253
337
465
626
5
12
10
50
382
504
504
504
0
0
0
0
419
632
700
779
440
644
782 1,026
APPLICATION OF FUNDS 1,015
1,217 1,543 2,616 2,910
1 August 2011
3

Balkrishna Industries Ltd
Balkrishna Industries Ltd - Valuations (EV/EBITDA)
10
9
8
7
6
5
4
3
2
1
0
Fwd EV/EBITDA
Avg EV/EBITDA
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Balkrishna Industries Ltd
No
No
No
No
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